i describe types of fixed-income indices;

Question 1

Fixed Inc Indices differ by…

Answer 1

By characteristics of the fixed income
instruments
By characteristics of the underlying
risks

Fixed income indexes can be classified by issuer, collateral, coupon, maturity, credit risk (e.g., investment grade versus high-yield), and inflation protection. They can be delineated as broad market, sector, style, or other specialized indexes. Indexes exist for various sectors, regions, and levels of development.

The fixed income security universe is much broader than the equity universe, and fixed income indexes have higher turnover. Index providers must depend on dealers for fixed income security prices, and the securities are often illiquid. Fixed income security indexes vary widely in their numbers of constituent securities and can be difficult and expensive to replicate.

Because of the wide universe of bonds that trade in financial markets, indexes are available (or can be constructed) based on virtually any feature or classification of bonds.

The bond universe is not more stable than the stock universe: One reason why the creation of a bond index is more difficult than a stock index is due to the fact that the universe of bonds is constantly changing because of numerous new issues, bond maturities, calls, and bond sinking funds.

Because some fixed income securities are illiquid, a lack of recent trade prices may result in indexes having to estimate values. Unlike stocks, bonds mature and must be replaced in fixed income indexes. As a result turnover is higher in fixed income indexes. Illiquidity, transaction costs, and high turnover make it more expensive and difficult for a portfolio manager to replicate a fixed income index than a stock index.

Question 2

Fixed Income Instrument

Characteristics

Answer 2

• Type of issuer: Generally government or
corporate
• Type of financing
• Currency (country)
• Maturity: Generally short-, mid-, or longterm
• Credit quality: AAA, AA, A, BBB, BB, B, …
– Investment grade is BBB and up.
– Speculative is BB and below.
• Inflation protection

Question 3

Characteristics of the Underlying

Fixed Income Risks

Answer 3

• Broad market indices
• Market sector
• Style indices
• Economic sector indices
• Specialized examples
– High-yield, inflation-linked, and emerging
market indices.